Recent Changes Regarding Noncompete Agreements

In 2023, both California and the federal government have sought to expand on a growing trend banning noncompete agreements.

Although California has a longstanding prohibition against noncompete agreements, the Federal Trade Commission’s recently proposed rule banning noncompete agreements could nevertheless have impacts on California employers, especially given the prevalence of remote work arrangements.  On September 21, 2023, the FTC announced an agreement with the U.S. Department of Labor to “protect[] workers who have been harmed or may be at risk of being harmed as a result of unfair methods of competition and unfair or deceptive acts or practices.”  This announcement builds on the FTC’s proposed rule in January 2023 to ban noncompete agreements nationwide.

California’s prohibition against noncompete agreements stretches back as far as 1872 and remains in force today.  The California legislature passed SB 699 in the most recent legislative session, the intent of which is to further broaden California’s ban on noncompete agreements to “prohibit an employer or former employer from attempting to enforce a contract that is void regardless of whether the contract was signed and the employment was maintained outside of California.”  The impact of SB 699 is to expand the current prohibition on noncompete agreements to those agreements that were signed outside of California.  Such agreements would currently prohibit California-based employers from hiring an employee who was or is subject to such a provision.

Notably, SB 699 further contains civil penalties and a private right of action, which will likely make such agreements susceptible to collective actions under California’s Private Attorneys General Act.  As SB 699 will involve instances of California employees and employers seeking to invalidate what may have been lawful agreements entered into in other states, the new law is also certain to be litigated and contested.  However, if the FTC’s rule is implemented and upheld, this could further support the enforceability of SB 699.  SB 699’s changes go into effect on January 1, 2024.

Although California’s noncompete prohibition is firmly established and may expand under SB 699, employers are not without recourse in terms of protecting their intellectual property.  Employers in California and elsewhere remain free to implement intellectual property agreements to protect the disclosure of trade secrets and other protected confidential information.  Consequently, while a California employer cannot prohibit an employee from taking a job with a competitor, it can prohibit that employee from using certain information they gained during employment in their new job.  California also allows the very limited enforcement of nonsolicitation agreements related to the poaching of employees, but these are generally disallowed in most situations and typically may only be enforced if the sale of a business is involved.

The FTC’s proposed rule could be rescinded or revised depending on the outcome of the next presidential election, and even if finalized will likely be litigated.  Further, SB 699’s provisions – especially those related to the altering of out-of-state noncompete provisions – will also likely be intensely litigated.  Nevertheless, these significant developments should be monitored closely in the coming months and years.

Ryan Stahl is a partner at Scherer Smith & Kenny LLP in San Francisco. His practice focuses on employment litigation and counseling for both employers and employees.